China's oil imports rise possible boon for U.S.

China's import dependency [34,224 bytes]
Rising CO₂ emissions in developing countries [81,333 bytes]

China's gas production potential [32,064 bytes]

China's rapidly growing need for imported oil can serve as the basis for constructive U.S. diplomacy throughout Asia, a new study asserts.

With economic growth lifting oil demand and domestic production unlikely to change, China soon will become a world-class oil importer.

The new role will force it to enter a host of trading relationships and security alliances, notes the study by the James A. Baker III Institute for Public Policy of Rice University, Houston.

The change provides a "moment of opportunity" for the U.S. to exercise "creative diplomacy," said Edward Djerejian, institute director and former U.S. ambassador to Syria and Israel, at a media briefing on the report.

Rising oil imports

Chinese oil demand, having risen to 3.95 million b/d from 2.1 million b/d in 1990, will reach 5.4-7 million b/d by 2010, according to the Baker Institute's year-long China study.

With domestic oil production remaining at about 3.1 million b/d, China's oil imports thus will zoom during the period from 500,000-700,000 b/d in the past 2 years to as much as 3.5 million b/d (see chart).

In search of new crude supply, China National Petroleum Corp. has invested heavily in Kazakhstan, Peru, Venezuela, and Sudan. It plans to invest in Iraq once the United Nations lifts sanctions there. And it has proposed transportation and exploration ventures in Iran.

But limits on feedstock flexibility make China's refineries unable to make direct use of more than 1 million b/d of crude from Iran, Iraq, Saudi Arabia, and Kuwait by 2005. Chinese refineries now can process 4.35 million b/d of sweet crude (less than 0.9 wt % sulfur), 160,000 b/d of medium sweet crude (up to 1.15 wt % sulfur), and 240,000 b/d of sour crude.

The crude-quality restriction will reduce the economic incentive for Beijing to seek client-state oil-for-arms alliances with any of the major Middle East producers, the study says.

And pipeline transport of oil from Kazakhstan would require international oil prices exceeding $14-15/bbl.

As it seeks solutions to its crude supply and quality challenges, China also must confront pressure under the Kyoto global warming treaty to reduce carbon emissions, with coal now accounting for 73% of its energy use.

The study calls costs of Kyoto compliance "prohibitive" and says the Chinese government probably won't make control of greenhouse gases a priority without subsidies from other industrial countries. It further doubts that Kyoto targets can be met without strong efforts by China and other developing countries (Table 1).

The study assumes that oil and coal retain their shares of the Chinese energy mix.

The natural gas share, it says, could rise from 2% to 8-10% by 2020 if the government encourages the change. Chinese gas production might then rise to 100 billion cu m/year from 22 billion cu m/year at present, supplemented by imports totaling 60 billion cu m/year (Table 2). Pipeline imports from Eastern Siberia and Central Asia could serve inland markets. Liquefied natural gas from Southeast Asia and the Middle East could meet demand on the southeastern coast.

The study says demand for gas-fired electric-power generation in the southern provinces could reach 11-18 billion cu m/year by 2005 and 20-35 billion cu m/year by 2010.

Geopolitical effects

China will enter oil and gas trade with little strategic leverage. Its military is relatively weak. And its diplomatic institutions and industries won't exert much influence in foreign affairs through energy trade.

The study thus throws doubt on worries that China's growing dependence on imported oil will destabilize Asia and cause a regional arms race.

"China's leadership will have to take a hard look at the possible outcomes from competition and conflict over energy resources and compare them with the potential benefits of cooperation on energy matters," it says.

Moreover, dependence on energy sources in common with the U.S., Japan, and other industrial countries means China's strategic interests "could actually blend more closely with Western interests in the Middle East." China would suffer with others, for example, from interruption by rogue regimes of the flow of oil from the Persian Gulf or Caspian region.

And China has a growing stake in the free navigation of Asian sea lanes, of which the U.S. Navy is a principal defender.

The study recommends the U.S. develop "a policy framework on matters of energy security" for all of the Asia-Pacific region and work to include China in the process.

It says U.S. leaders should discuss with Chinese leaders "emerging mutual interests, particularly with regards to energy security issues in the Persian Gulf." They should pursue "constructive engagement" with China and follow a "wait-and-see" approach to containment strategies.

The study urges coordination of U.S. policy-making at high levels of government and implementation through many levels of government and private business.

It says the U.S. should encourage China to make development of natural gas resources "a key priority of its national energy policy."

And it supports a role for emerging technologies in automotive and power industries, possibly with public support, to "help fill the gap that the Kyoto agreement leaves behind in reducing overall levels of global emissions from key developing nations."